Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 22nd September 2022

On Monday, Queen Elizabeth II’s coffin was lowered into the Royal Vault at St George’s Chapel in Windsor Castle, bringing to an end a 10-day public mourning period for Britain’s longest-reigning monarch. The last chants of “God save the Queen” were heard as onlookers scattered flowers on the road, and muffled church bells rang in the distance.

The “second Elizabethan age” was symbolically brought to a close with the monarch having been 70 years on the throne given a warm farewell in the UK. Commoners watched as dignitaries from all over the world paid their respects and attended receptions. Surely, it is a measure of her success. King Charles III begins his reign amid strife in Britain, populism in the West and a challenge to democratic systems led by China and Russia, the legacy by HRH Elizabeth II bears examination.

Immediately, following the funeral service, there is an immediate test for the newly appointed prime minister Liz Truss. She faces a cost-of-living crisis. This is quite a formidable challenge and there has been severe criticism from various quarters on how best to revive the British economy. Ms Truss has swiftly ditched her campaign stance of opposing “handouts” and is guaranteeing to cap average annual household energy bills. She promised businesses will get help, too. The price shock for households and firms in UK requires bold action as the Bank of England predicted a recession next year.

But pragmatism need not mean reckless abandonment of free-market principles and fiscal responsibility. It would be better to offer consumers a big rebate rather than mute price signals altogether through a cap. The plan will initially be funded through borrowing, a splurge that will force the country to raise interest rates even higher.

The risk is that Ms Truss’s formula will depend too much on a mixture of tax cuts, and deregulation. Ms Truss seems to be betting that headline tax cuts will lead to higher growth, when the evidence is ambiguous at best. Now that the pandemic has ebbed, many had expected a reprieve from more belt tightening. Instead, partly due to the Ukraine war and the explosion in oil and gas prices one expected better. Some had hoped that the pent-up demand by Europeans who sacrificed leisure and travel during the two-year lockdowns and curfews will lead to a swift recovery. 

Economists generally use the term “pent-up demand” to describe the general public’s return to consumerism following a period of decreased spending. The idea is that consumers tend to hold off making purchases during a pandemic, building up a backlog of demand that is unleashed when signs of a recovery emerge.

This is an optimistic view shared by many small and medium sized companies that have just sailed through a lockdown or a restrictive curfew which saw their revenues drop considerably.

The furlough schemes may have felt like a sick patient being fed nutrients through a drip bottle leaving it with little energy to wake up and start functioning in a normal way.

Close to home, we read the commentary issued by the Central Bank of Malta confirming a contraction of 8.2% in 2020, in gross domestic product (GDP). Boldly, it predicts that there will be a rebound this year and is expecting a healthy 5.5% growth over 2021 and 4.7% in 2023.

Certainly, nothing like the stellar growth reached in the “l-Aqwa Zmien” years so cherished by party apologists under the dreamlike Joseph Muscat administration. One may ask, what contributed to this sudden economic contraction other than the decimation of the tourist sector matched with declining net exports. Many point to a disruption in the global supply chain.

What was seen as the Cinderella factor is a severe drop in domestic demand. Politicians tend to underplay the importance of local demand when they seek to placate the worried electorate that their jobs are on line. The main trust of the present Abela administration was the maintenance of low unemployment and supplementing of a controlled wage subsidy (latest Labour Force survey shows over 9,000 unemployed). The furlough scheme was administered by Malta Enterprise and we heard frequent adulations that there were 100,000 (almost 50% of non-state employees) assisted by the scheme.

Definitely, as employers were subsidized under the scheme there were fewer layoffs although as can be seen later in this article there were segments such as retail and small manufacturing which faced acute cash flow shortage and laid off workers.

Again, in the case of employees which survived solely on receiving the furlough rate (since employers had no income) it is debatable if JobsPlus should treat such workers as gainfully employed. Back to the issue of subdued domestic demand, an improvement can be compared to a fulcrum that is expected to positively start an economic Renaissance.

This could be a dream come true. It is obvious that for a nation with no natural resources, we all concur that our unique cohort of workers have to be trained to reach a higher level of prowess. During the lull in productive activity caused during the 16 months of pandemic, it was our duty to reap full advantage of idle time and use this for training of workers (there is little evidence of this such effort given that only 20% students passed the Maths “O” level).

For many years, we had finance ministers promising us to give top priority to further education. Since Independence, we clamour for a higher cohort of trained workers with skills involving science, technology, engineering and maths (STEM) yet facts show that we have not yet achieved our targets in higher technical education.

In the past four years there have been resignations in the ministry of education with four new ministers. It is true, that we invest millions in education from kindergarten to tertiary levels yet we still have some way to go to solve the skill mismatch in particular sectors.

To conclude, there are a number of indicators that the economy can only flourish once the fundamentals are in place and herd immunity is achieved by end of the year.  We can never underestimate the importance of maintaining social equality since wealth distribution during the past year has taken a turn for the worst.

The passing away of the much-loved British monarch may embolden us to face tough local economic conditions next year. 

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 22nd September 2022
Get in touch: info@pkfmalta.com